Canada: Ontario Securities Commission Releases Latest Investment Funds Practitioner

The Investment Funds Branch of the Ontario Securities Commission (OSC) recently issued its latest Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents that investment funds file with the OSC.

Set out below are highlights from the May 2013 Practitioner.

Character conversion transactions

The 2013 federal budget contained proposed amendments to the Income Tax Act (Canada) that will effectively prohibit investment funds from treating the economic return of a reference fund as a capital gain where the investment fund is using derivatives to provide investors with returns based on the performance of the reference fund. The proposed amendment would instead treat such returns as ordinary income. OSC staff wishes to remind fund managers that they should consider what actions to take in response to the proposed amendment, including capping an affected fund to new and additional investments, communicating with securityholders and potentially changing an affected fund's investment objectives and strategies.

Issuers cannot rely on third-party information

OSC staff has noticed that issuers have been adding disclaimers in prospectuses with respect to the accuracy of third-party information in prospectuses (such as economic data or index information that is publicly available). Issuers remain liable under Section 130 of the Securities Act (Ontario) for misrepresentations in a prospectus, even if they result from information that was sourced from a reliable third party. As such, the position of OSC staff is that such disclaimers should not be included in prospectuses.

Mortgage-pooled investment funds may be deemed corporate issuers

OSC staff has begun to examine the relationship between (i) non-redeemable investment funds that invest all or substantially all of their assets in pools of non-guaranteed mortgages and (ii) the other entities named in the prospectus (including the mortgage originator, mortgage service provider and promoter of the issuer) to determine whether the issuer is in substance a corporate issuer (rather than an investment fund). Generally, where the mortgage originator or a service provider exercises any degree of control or active involvement in the formation or operation of the non-redeemable investment fund or its investment portfolio then OSC staff will question whether the issuer is, in fact, an investment fund. Managers planning to launch such products should contact counsel at an early stage to discuss the implications of OSC staff's views.

OSC homes in on bullion funds

OSC staff is interested in how certain bullion-based investment funds and their managers have responded to the recent downturn in gold bullion prices (in mid-April 2013), including how discount and premium spreads were impacted and how fund managers were able to assess a fund's ability to meet redemption obligations by liquidating bullion holdings. OSC staff has conducted a targeted review of investment funds whose portfolios are comprised substantially of bullion, including many that have obtained exemptive relief to invest exclusively in bullion notwithstanding concentration restrictions under securities regulations. The review is ongoing and OSC staff continues to monitor the situation.

Websites in need of refresh on continuous disclosure

OSC staff wishes to remind managers that Fund Facts and IRC Reports to Securityholders must be prominently displayed on websites with a view to making them accessible to the general public.

Fee disclosure is material, even in short-form prospectuses

Managers that qualify their investment funds with a short-form prospectus are reminded that they must provide full, true and plain disclosure regarding fees and expenses of the investment fund. In addition to any form requirements applicable to short-form prospectuses, managers are expected to include a "Fees and Expenses" section that describes:

  • expenses of the offering;
  • subscription and management fees;
  • operating expenses;
  • other fees and expenses of the fund; and
  • fees payable by securityholders of the investment fund, as applicable.

Flow-through LPs allowed to depict annual after-tax returns

OSC staff has noticed that many flow-through limited partnership prospectuses are including performance data depicting annualized after-tax returns. OSC staff is generally prepared to allow this provided that annualized before-tax returns are also disclosed in the prospectus. Filers are reminded that where performance data is presented in a long-form prospectus, annual compound returns must be presented for standard applicable performance periods (1, 3, 5 and 10 years and since inception) unless otherwise specified by applicable form requirements.

CSA may relax restrictions for scholarship plans

The Canadian Securities Administrators (CSA) are considering relaxing some of the investment restrictions that currently apply to scholarship plan providers. Specifically, the CSA are considering permitting scholarship plans to enter into undertakings that would establish terms and conditions under which the scholarship plans could make limited investments of the income portion of the plans (not principal) in equity securities.

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